The last 48 hours have seen numerous central bank announcements around the globe and what we have seen for the most part is very little action, but lots of hints as to which way they are leaning.
It started with the Federal Reserve keeping the Fed Funds target rate between 1.5% and 1.75%. This is what investors expected so this wasn’t a surprise. Where the surprise came was that the vote was unanimous. In the last four rate-setting meetings, there had been dissension about the final decision. It was also surprising to see 13 out of 17 Fed policymakers see no changes in rates during 2020. The other four members saw one rate hike in the next 12 months.
On Thursday, the Swiss National Bank (SNB) maintained its rate level at -0.75%, the lowest rate of any central bank in the world. The bank indicated that it doesn’t intend to increase the rate anytime soon. Swiss banks have been critical of the negative-rate policy but Thomas Jordan, Chairman of the SNB, defended the rate policy. At a news conference following the decision, Jordan stated, “Without it, the franc would have been significantly stronger in recent years, which would have been highly detrimental to the Swiss economy and would have jeopardized price stability.”
Later on Thursday, the European Central Bank concluded its first meeting under the guidance of new president Christine Lagarde. The ECB kept its rate unchanged at -0.5% and that was also widely expected. The biggest surprise from the ECB meeting was an end to the quantitative easing bond purchases, but the bank fully intends to keep its reinvestments going.
“The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary,” the ECB said.
There was also news out of China on Thursday, but it wasn’t a central bank meeting, but rather the annual Central Economic Work Conference. At the meeting officials decided to maintain its current fiscal policy that is focused on more effective fiscal policy and a flexible monetary policy. According to the Xinhua News Agency, China will maintain its proactive fiscal policy as it tries to curb the slowdown in the overall economy.
We also saw the Royal Bank of India keep its rate unchanged, but the RBI had been in a cutting phase and halted the process as inflation fears are starting to rise. The Bank of Russia is expected to cut its interest rate by a quarter of a point when it makes its announcement on Friday.
Based on all of the indicated guidance regarding more dovish policies, you would have expected equity markets to jump on the news. However, most world indices were either down or seeing small gains. Global markets did jump on Thursday morning, but it was after President Trump tweeted that the U.S. and China were getting close to finalizing the first phase of a trade deal.
The muted reaction from stocks to the more dovish tones from the various central banks was surprising. Perhaps investors are concerned that with the central banks hinting at more accommodative policies, they are concerned that the bankers see issues in the global economy going forward.
Normally more accommodative policies would be greeted with enthusiasm from investors, but that wasn’t the case this week. This could also be an indication that the global trade picture is outweighing global monetary policy—at least that is what the reactions suggest.